ADD on Bajaj Finance - Long-term story intact despite FY21 glitch - HDFC Securities

Mr. Darpin Shah, Institutional Research Analyst, HDFC Securities.

We initiate coverage on Bajaj Finance (BAF) with an ADD rating and a target price of Rs 3,643, 4.7xSept-22E ABV. It is one of the largest NBFCs and perhaps the most diversified one in the country. It has consistently delivered strong performance across fronts. Over FY13-20, its AUM grew at a CAGR of ~35%, RoAEs averaged ~19.6%, and GNPAs did not exceed 1.7%. However, its near-term performance is likely to be a stark contrast to that seen in recent times due to the overarching impact of COVID-19. FY21E is likely to be an aberration in terms of growth, asset quality, and return ratios, but we expect a significant recovery in FY22E. While our near-term outlook may seem lacklustre, we believe that BAF's long-term prospects remain reasonably intact, despite COVID-19. Further, we believe that current valuations do not adequately price in BAF's potential to sustainably deliver superior return ratios in the long term. This underpins our positive stance.

Near-term outlook: In FY21E, we expect AUMs to de-grow by 1.9%, as sustained disruption to real economic activity would result in muted credit demand and some degree of risk aversion; we expect AUM growth to revive to ~23% YoY over FY22-23E. Furthermore, we expect GNPAs to rise to 3.89% in FY21E (the highest in the past 10 years). Consequently, we believe there would be a sharp rise in LLPs to 4.12% in FY21E, followed by a reduction to ~2.35% over FY22-23E. Other income traction is likely to slow down due to lower business volumes, which would also result in a fall in cost ratios (we estimate a C-AA ratio of 3.6% over FY21-22E vs. 4.1% over FY18-19). As a result, we believe the RoAE may fall to 12.5% in FY21E and recover to 17.4/18.8% in FY22/23E.

Valuation: BAF is currently trading at 4.07xFY23E ABV. The current valuation does not appear to fully factor in the company's potential to sustainably deliver superior return ratios. We believe that BAF can deliver an RoAE of 19%+ in the long term. Our view is supported by (1) BAF's RoAE track record, and (2) significant potential for AUM growth. Further, COVID-19 is likely to dent return ratios only temporarily, with the impact mostly limited to FY21E.

Risks and scenario analysis: The uncontrolled spread of COVID-19 could result in sustained disruption to economic activity beyond FY21E, and this poses downside risks to our estimates. In an attempt to measure the impact of such outcomes on our estimates, we have examined them under three scenarios. In our most extreme scenario, (1) FY21/22/23E RoAEs could fall to 8.1/12.8/15.2%, (2) FY22/23E ABVs could be 10.5/9.6% lower (vs. our base case), at Rs 623/760, and (3) our assigned multiple would fall to 3.7x.

Shares of Bajaj Finance Limited was last trading in BSE at Rs.3330.9 as compared to the previous close of Rs. 3418.85. The total number of shares traded during the day was 194073 in over 16521 trades.

The stock hit an intraday high of Rs. 3450 and intraday low of 3306. The net turnover during the day was Rs. 653400195.

Source : Equity Bulls

Keywords